If I Could Buy Only 1 Marijuana Stock, This Would Be It

According to the Chinese, 2018 will be the year of the dog. When it comes to marijuana stocks, though, I don't expect there will be too many dogs in 2018. Actually, I suspect this could be the best year ever for many marijuana stocks.

My prediction is that several Canadian marijuana stocks will generate huge returns this year, assuming everything stays on track with legalization of recreational marijuana in the country. Several cannabinoid-focused biotech stocks should also be winners. But which is the best marijuana stock to buy? If I could only buy one marijuana stock, it would be (drum roll, please) GW Pharmaceuticals(NASDAQ: GWPH). Here's why.

Marijuana leaf on top of $100 bills

Image source: Getty Images.

Looking at the long term

Let me first state something that might be confusing: I don't think GW Pharmaceuticals will be the best-performing marijuana stock in 2018. It probably won't even rank among the top five winners.

In December, I wrote that the top marijuana stocks to buy in 2018 were Canopy Growth(NASDAQOTH: TWMJF), MedReleaf(NASDAQOTH: MEDFF), and Aurora Cannabis(NASDAQOTH: ACBFF). I still think that's true. The Canadian medical-marijuana market continues to grow. All three companies have expanded into international markets. And all three have tremendous production capacity to help meet what should be enormous demand when Canada legalizes recreational marijuana.

So why wouldn't I choose one of those stocks as my personal pick? I like to invest for the long term.

While my take is that the Canadian marijuana stocks will skyrocket (again) this year and maybe next year also, the reality will set in sooner or later: Marijuana is a commodity. While demand outstrips supply, these companies and their stocks will perform really well. But it's not hard to envision what will happen when supply catches up to demand, as it inevitably will. Stocks that carry valuations based on expectations of rapid growth will nosedive.

Marijuana buds on top of tiny Canadian flags

Image source: Getty Images.

The bottom line for me is that these stocks don't have moats. However, I think that GW Pharmaceuticals will have a pretty strong moat for its lead candidate Epidiolex. First of all, the drug obtained orphan designation in both the U.S. and Europe. That gives Epidiolex 7 years of exclusivity in the U.S., plus another six months if it gets a pediatric extension. In Europe, orphan-drug designation gives the drug 10 years of exclusivity, with the potential of another two years with a pediatric extension.

There's more. GW Pharmaceuticals has done a great job in pursuing an aggressive patent strategy for cannabidiol (CBD) drug Epidiolex and other pipeline candidates. So far, the company has won three U.S. patents. GW expects several major decisions on U.S. patent applications in the first half of 2018.

GW Pharmaceuticals' potential

Of course, Epidiolex must first win regulatory approval. The FDA should make a decision by June 28. Based on the overwhelmingly positive clinical studies for Epidiolex in treating Dravet syndrome and Lennox-Gasteaut syndrome (LGS), I think the chances for approval are good. GW also submitted Epidiolex for European approval, with a decision expected in the first quarter of 2019.

Assuming Epidiolex does win U.S. approval, it will also require scheduling by the U.S. Drug Enforcement Administration. GW expects that to be done in the third quarter of this year, with a commercial launch following soon thereafter.

Sales estimates for Epidiolex are all over the map. The most pessimistic estimate I've seen is $300 million, while others peg peak sales at $2 billion or more. My best guess is the actual peak annual sales for Epidiolex will be somewhere between $800 million and $1 billion for the Dravet syndrome and LGS indications.

Marijuana buds on table next to beakers containing green liquid

Image source: Getty Images.

But GW Pharmaceuticals is targeting more than just those two indications. The biotech is evaluating Epidiolex in a late-stage study for treatment of tuberous sclerosis and in a phase 2 study for treating infantile spasms. These other indications could add another $300 million or so in peak sales.

The company also has more pipeline candidates. GW's cannabidivarin (CBDV) drug GWP42006 is in a phase 2 study targeting treatment of epilepsy and a phase 1 study for treatment of autism spectrum disorders. GWP42003, which contains both CBD and tetrahydrocannabinol, is being evaluated in a couple of phase 2 studies for treating glioblastoma and schizophrenia. The experimental drug is also in an early stage study targeting treatment of neonatal hypoxic-ischemic encephalopathy (NHIE).

GW's CBDV product holds the potential for peak sales of close to $700 million in epilepsy alone. GWP42003 could generate annual revenue of around $700 million also for the glioblastoma and NHIE indications. And if the drug is successful in treating schizophrenia, GW could be looking at another $600 million to well over $1 billion in annual sales.

Risk-reward proposition

While there's enormous potential for GW Pharmaceuticals, there are also significant risks. I'm not too concerned that Epidiolex will fail to win approval, but anything can happen.

It's also possible that reality skews more toward the pessimistic sales outlook for the drug. Zogenix(NASDAQ: ZGNX)reported positive results in 2017 from its experimental drug ZX008 in treating Dravet syndrome. The biotech is also planning to move forward with studying the drug in treating LGS. If Zogenix succeeds with ZX008, it could potentially dampen Epidiolex sales.

GW Pharmaceuticals' other pipeline candidates carry even greater risks. The chances that a drug in phase 1 or phase 2 studies don't ultimately make it to market are pretty high.

Chalkboard drawing of risk and reward on scales

Image source: Getty Images.

Having said all of that, I still like GW Pharmaceuticals. The company's market cap currently stands at around $3.6 billion. That valuation gives GW stock plenty of room to run if Epidiolex is as successful as I think it will be in the Dravet syndrome and LGS indications. And good news for the drug in treating additional indications or from GW's other pipeline candidates would be icing on the cake.

The other thing to consider is that a strong launch for Epidiolex should put GW Pharmaceuticals in solid financial shape within the next couple of years or so. That would allow the company to funnel more money into development of more candidates.

I like GW's overall risk-reward proposition. I like its potential moat, assuming the company wins more patent approvals. There are better marijuana stocks to buy over the short term. But for a long-term investor looking to buy a marijuana stock, I can't think of a better choice than GW Pharmaceuticals.